Why Automatic Enrolment?

As the demographic of the population has changed we now have people living longer and longer into their old age and less of working age to pay for them. This is called the dependency ratio. Occupational schemes such as police or civil service pensions are unfunded and paid from the taxation of the working population. State pensions are unfunded in the same way which means with more old age pensioners and less funding we have a demographic time bomb. This demographic time bomb been increasingly concerning to the government and with the fact an estimated 7 million people have no pension provision apart from the state pension they set a three person commission the task of reviewing the state of private pension provision in the UK.

The three commissioners were Turner, Drake & Hills and the commission published three reports. The first of which was published in October 2004. It noted that the population was ageing and the major changes would be required. The second report published in November 2005 suggested that almost all employees be automatically enrolled into a workplace pension scheme. In many cases an existing scheme could be used for this purpose but to ensure a low cost pension was available to employers it proposed the establishment of a National Pensions Saving Scheme (NPSS). The final report was published in April 2006 and considered the issues to be address in established the proposed NPSS. The government decided to implement there commendations and the NPSS was superseded by the term personal accounts and the pension act 2007 created a body called the pension accounts delivery authority (PADA) to implement the new scheme. In 2010 this was re-branded the National Employment Savings Trust or NEST. The pension act 2008 formally committed the government to the principles of automatic enrolment.

The automatic enrolment (miscellaneous amendments) regulations 2012 provided that over a 5 year period commencing in 2012 employers would be required to enrol employees into a workplace pension scheme. Employees can opt out but would be re-enrolled every 3 years unless they opted out again. Employees who would be subject to the automatic enrolment regime would be between 22 and state pension age and earning over a specific threshold. The new rules require that the scheme used by the employer may either be an occupational scheme or a contract based alternative. Both defined benefit and defined contribution arrangements are acceptable but would need to meet specific rules to be qualifying. The commission believed it would be necessary to establish a low cost national pension and NEST was introduced. NEST is an occupational scheme which is established by a trust deed and governed by a board of trustees but is constitute in such a way that an UK employer may use it as a qualify scheme. It is a defined contribution scheme and is bound by a public service obligation which guarantees that any UK employer can use it to comply with the obligations arising from the pension act 2008 (automatic enrolment).

Paul Johnson, Yeadle and Boulding led our view of auto enrolment in 2010 and concluded:-

The automatic enrolment earnings threshold for inclusion should be aligned with the basic personal allowance for income tax

The ages of 22 years to state pension age was appropriate for inclusion.

No employer will be exempt from automatic enrolment.

The DWP should ensure that employers could not be held legally liable for their choice of qualifying scheme.

There should be simpler contribution rules for the DC scheme.

The introduction (timing phase) should be made simpler.

The rules regarding triennial re-enrolment should be relaxed.

The Government should ensure that it is easy to ensure accrued pension rights are easy to transfer from scheme to scheme when employees change employment.

The Government should try and harmonise some of the regulatory differences between the occupational schemes and the contract based alternatives.

NEST should be retained. The changes were implemented as part of the pension Act 2011.